The appropriate valuation and analysis of manufacturing costs have been for years a key factor in a successful business management. Manufacturing costs are commonly calculated on the basis of average cost, standard cost, periodic cost, last-in-first-out (LIFO) cost, or first-in-first-out (FIFO) cost. These costing methods are implemented on computer systems. Companies choose the costing method that is best suited for their business requirements, or that is required by law. It is not unusual to find companies using one method for fiscal or legal purposes and another for internal management analysis.
Transfers of goods (e.g., raw materials and/or manufactured sub-assemblies) across organizations are common in the business world. The cost of the goods being transferred, as well as freight and/or special charges involved in the transfer process, often impacts the average cost of the item. This is particularly true when inventory valuation is determined by the absorption costing method. In absorption costing, variable costs and some of the fixed costs are assigned to each item in the inventory.
Some scenarios for transferring materials can be defined very simply, thus simplifying the calculation of absorption costs. For example, FIG. 1A shows a simple transfer of an item between two cost groups. In FIG. 1A, cost group 1 (e.g., 101) ships an item to cost group 2 (e.g., 102). In the scenario of FIG. 1A, cost group 1 bills cost group 2 for the unit cost already known for the item being transferred. The price for this item to cost group 2 includes the price of the item charged by cost group 1, as well as any freight or other special charges associated with the transfer of the item.
Other scenarios are more complex depending on the volume of the organizations and the relationships between them, thus complicating the calculation of absorption costs. For example, inter-organization transfer of goods between cost groups (e.g., warehouses, manufacturing plants, etc.) makes absorption costing difficult. In scenarios where transfers of the same item occur back and forth between two facilities make the process of costing the transfer even more difficult, since the correct sequence for processing transfers is not always obvious. Additionally, if the two cost groups are located in, for example, warehouses in two different locations, different costing methods may complicate accurately costing the transfer of goods.
As shown in FIG. 1B, there are transfers from cost group 1 to cost group 2 as well as transfers from cost group 2 to cost group 1. Thus, cost group 1 bills cost group 2 for the unit cost already known for the item being transferred. The price for this item to cost group 2 includes the price of the item charged by cost group 1, as well as any freight or other special charges associated with the transfer of the item. The receiving cost for cost group 2, as many other cost owned transactions, is considered for the calculation of the average cost of cost group 2. In return, cost group 2 bills cost group 1 for the unit cost already known for the item being transferred. The price for this item to cost group 1 includes the price of the item charged by cost group 2, as well as any freight or other special charges associated with the transfer of the item. Thus, the cost of receiving the item should be considered when calculating the average cost of the item for cost group 1.
In more complex scenarios, as shown in FIG. 1C, the proper sequence for processing the transfer of items is not readily apparent. In FIG. 1C, the costing of transferring the item is complicated by the multiple transfers as described above with reference to FIG. 1B, as well as the plurality of cost groups (e.g., cost groups 101 through 106) between which the item is transferred. For example, with reference to FIG. 1C, it may be difficult to determine which cost group should be first in the costing sequence and which should be last. Additionally, determining that the cost of the transfers between the cost groups is accurate is difficult. Finally, if the sequencing of the cost groups when determining absorption costs is not correct, one cost group may actually show a negative inventory.